You have had mounting concerns about a US default and gold has done dick all – in fact , it has gone down.

This begs the question – if gold can’t rally when there are concerns of a US default – when can it? This is a seriously broken trade.

You could argue that golds weak performance is because the market is assigning zero probability of a default – but you would be wrong.

You have seen activity in the treasury market that indicates participants are positioning themselves for a potential default. Granted, not massive shifts, but shifts none-the-less. Money market participants have been balking at short term US paper on concerns the Government will fail to meet its short term obligations. This is reflected in rising yields on 3 month paper. You will also notice that this differs from securities further out on the curve, which have actually come in.

Treasury Curve – Current and 1 Month Change

If you have been involved in the market for a few years, you will recognize this for what it is – incredible. Sure, small changes, but the fixed income market is nervous about the US Governments willingness (not ability) to service its debt obligations.

Gold performance over this time period… down…

Gold – 30 Day Performance

As you know, gold moves as a crisis hedge and/or as an inflation hedge.

Confidence in gold as a crisis hedge is seriously wounded. That’s not an opinion. That’s a fact. If gold can’t rally when there are concerns of a US default, it won’t. Sure, the crisis hedge status of gold will resurface at some point. But right now, no one cares, and why would they? How did holding gold work out for them during the last systemic shocks to the financial system? Poorly – when there is a dash for cash – nothing is spared.

The other driver, gold as an inflation hedge, will probably cause the next leg up in gold. The growth at all cost strategies being employed by central banks, and rampant currency devaluation (low interest rates) will ultimately stoke inflation. That said, there are no signs of this as of yet in headline inflation data, which remains at very subdued levels. Sure, officials get creative with inflation data, sure inflation is showing up in various asset prices, but it is not a concern at the present time with the general public. No one cares.

So, no one cares about golds crisis hedge status and/or its inflation hedge status – why would you? This will of course change, but serious short term catalysts have yet to emerge. Sure, gold will go up in the long run. Doesn’t everything though? Even Japanese stocks are presently going up. If you were there for the last 20 years though, does that make you right?

The selloff in gold has been painful. With many false starts as traders try to time a bottom. Each attempt at upward momentum has ended in tears.

Why be a hero and try to make the first 15 – 20% off the bottom? If the returns in gold and gold stocks are going to be as monstrous as the bullish arguments suggest, why not wait for some confidence to return to the market first?

We are sticking with our thesis on gold that we have had since it was testing/broke support at $1,600/oz. As we wrote in April of this year:

“we are looking for a combination of the following: a gold chart that makes a series of higher lows / a gold price that begins to react positively to bullish factors / endorsements by some high profile investors / indication that depressed prices will severely impact supply / a stabilization in the redemption of ETF holdings by retail investors”

These conditions are not yet prevalent. No one cares about gold. Until they do, we are happy to be on the sidelines.

This report is intended for the sole use of the person for whom it is addressed and is distributed only so far as may be permitted by applicable law. Securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investor. The information contained herein should not be relied upon by any other recipients including private clients. The information contained in this document is provided at the date of publication and is drawn from sources believed to be reliable but has not been independently verified, therefore, the accuracy or completeness of the information is not guaranteed, nor does the information purport to cover all information available on the subject, nor in providing it does Verdmont Capital or any group company or firm or associate assume any responsibility or liability except to the extent required by applicable law. The information contained in this report may be based on assumptions and different assumptions may produce materially different information. The analyst responsible for preparation of this report may interact with sales and trading personnel and other departments in collating and interpreting market information. Information on which this report is based is retained in accordance with regulatory requirements and may be made available upon request. This report is published for information purposes and is not to be construed as an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction. Past performance is not indicative of future performance. Investors should be aware that the value of investments can rise or fall and need to be aware of these risks in exercising investment decisions. Foreign currency exchange rates can also adversely affect investment returns. Verdmont Capital will initiate, report and cease coverage at the sole discretion of Verdmont Capital and is under no obligation to update information herein. Verdmont Capital and affiliated companies or persons or employees thereof may continue to, have a position in the securities mentioned herein, including options, futures or other derivative instruments thereon, and may, as principal or agent, buy and sell such products. Each research analyst and associate research analyst who authored this document and whose name appears herein certifies that (1) the recommendations and opinions expressed in the research report accurately reflect their personal views about any and all of the securities or issuers discussed herein that are within their coverage universe and (2) no part of their compensation was, is or will be, directly or indirectly, related to the provision of specific recommendations or views expressed herein. This report is not intended for distribution to US persons or Canadian residents.